What Do You Get When You Cross a BP with an XOM?

A very strange thing indeed.

There are rumors that Exxon Mobil (XOM) is considering a takeover of BP plc (BP).  I have no firm opinion on the likelihood of such a combination.  But it would be a challenge to combine these two behemoths, for more than the usual reasons.  In particular, Exxon is not trading oriented, but BP is.  BP has an extensive and highly profitable trading operation, Exxon does not.  Indeed, recent experience (the trading joint venture with Duke Energy) probably did a lot to confirm Exxon’s belief that trading is far more trouble than it’s worth.

So what would happen, in the event of a merger?  Would Exxon spin off the BP trading operation?  But who would buy, since so much of the trading operation derives its profitability from trading around physical assets?  Would Exxon just shut down, or cut back, BP’s trading?  But given that  a non-trivial portion of BP’s profits come from trading, if it were to do that the price that XOM would be willing to pay might be considerably less attractive to BP.

All things considered, it seems like a most unnatural combination.

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